Capitalisn’t: The Establishment

Speaker 1: All right, let’s talk a little business. Two tech giants have decided to go ahead and merge after a contentious, years-long battle. A federal judge has now approved the $85 billion merger of AT&T and Time Warner.

Speaker 2: It gives AT&T access to Time Warner’s assets like CNN and HBO, and its content. Critics say the merger could lead to higher prices.

Speaker 3: I mean, this was a scathing and total rejection of the government’s theory that this merger would violate antitrust law.

Kate: Hi. This is Kate Waldock from Georgetown University.

Luigi: And this is Luigi Zingales at the University of Chicago.

Kate: You’re listening to Capitalisn’t, a podcast about what’s working in capitalism today.

Luigi: And, most importantly, what isn’t. And speaking about what isn’t working, one of the key elements of capitalism is competition.

If there’s not enough competition, we should have some antitrust enforcement. The United States was the first country that understood that in order to create competition or maintain competition, sometimes you have to add some form of government intervention.

Kate: You probably heard about the recent AT&T/Time Warner merger that the government tried to block on antitrust grounds, but fell a little short of.

What you maybe haven’t heard of is that there’s actually a debate raging in Washington. It’s not about Trump or Stormy Daniels or Russia or collusion. It’s actually about antitrust.

Luigi: This debate is about what is the soul of antitrust, what is the antitrust that policy should aim at, and how should it be conducted? And this debate is a debate that started more than 100 years ago and has been resurrected in recent years.

Kate: One side we’re going to call the consumer welfarists, and we’re going to focus on that side in today’s episode. One of the things we’re going to do is go back to an interview between Luigi and I and Carl Shapiro, who’s a prominent academic in antitrust, and who also supports the consumer welfare camp.

On our next episode, we’re going to interview Lina Khan, a prominent legal scholar who is on the other side, the New Brandeisian side, and get her perspective on the antitrust debate.

Luigi: Let’s start the episode with a little bit of history that gives context to the problem. First of all, there’s a long-lasting tradition in The United States of fighting against monopoly. In fact, this tradition goes back to nothing less than the American Revolution.

Most people remember the Boston Tea Party as a revolt against taxes. In fact, it was a revolt against the East India Company that was dumping tea and damaging the local importers of tea. You can think about the American Revolution as a revolution against one of the worst monopolies in history that was the East India Company.

But more recently—and what generates some of the legislation that is still in place today—at the end of the 19th century, people were concerned about the excessive concentration of economic power in a few hands. In particular, these were the railway companies and the telegraph. You probably have heard, if you remember your history, of the robber barons. This is exactly the period of the robber barons, and this is when Senator Sherman introduces in the Senate, and then makes law, the so-called Sherman Act. The Sherman Act is the first piece of legislation that tries to fight monopolies.

Now, what is important to keep in mind is that the 1890s is also the time when the Principles of Economicsby Alfred Marshall is published for the first time in England. There’s no doubt that Sherman did not know about what was going on at the time. So, all the economic apparatus that we now use in antitrust, and got started to some extent by Alfred Marshall, was completely not present at the time.

The spirit behind the Sherman Act is a spirit that was also behind the American Revolution, to limit concentration of economic power, because power corrupts, and absolute power corrupts absolutely.

Kate: Luigi’s favorite phrase. The Sherman Act is the basic foundation of antitrust law in the United States. What it does a little more specifically is that it outlaws monopolies, and it also outlaws “every contract, combination, or conspiracy in restraint of trade.” The text of the Sherman Act is pretty vague, but that’s partially what has allowed it to be flexible and adapt to the changing nature of commerce over time.

There’s two other major pillars of antitrust law in the United States that came about a little bit later, about 25 years later. One is the Clayton Act, which was passed in 1914, and that prohibits other types of monopolistic behavior. In particular, price discrimination, anti-competitive mergers and acquisitions, and certain forms of sales that are considered anti-competitive, like tying agreements that force people to buy one product if they also buy another product. If that gives rise to a monopoly, that is outlawed under the Clayton Act.

There was also, in 1914, the Federal Trade Commission Act, which banned “unfair methods of competition,” as well as “unfair or deceptive acts or practices.” That gave the FTC a slightly broader mandate than just antitrust.

In the context of today’s antitrust enforcement, if you’re wondering who can bring about an antitrust suit against one of the big businesses, well, there’s the Department of Justice enforcing the Sherman Act or the Clayton Act. There’s also the Federal Trade Commission. Any of the state attorneys general can also bring an antitrust suit based on either state or federal antitrust law. And private citizens can also bring antitrust actions against businesses.

Luigi: Much of this law was introduced toward the end of the 19th century or beginning of the 20th century, and most people remember from their high school history that Theodore Roosevelt was a big antitrust guy. In fact, during his period, major antitrust cases were brought.

However, antitrust for a while got prominently less important until, actually, Thurman Arnold was appointed as attorney general in 1938. He was the first one that really went after many, many businesses and associations. He sued even the American Medical Association for closing practices, exploding the realm of antitrust.

In the ’50s and ’60s, the antitrust enforcement was extremely aggressive. In 1963, for example, there was a case that went up to the Supreme Court of the National Bank of Philadelphia that was trying to merge and gain a 20 percent market share locally. And the Supreme Court said that 20 percent was too much. Now, the 1963 Supreme Court decision was written by a young clerk for the then-justice named Richard Posner.

Richard Posner later moved to Chicago and became one of the main proponents of the Chicago school of antitrust that actually revolutionized the view of antitrust in the world in a way that is still there today.

The premises were actually quite interesting, because most people think that Chicago was always against antitrust as a tradition. This is not true at all. In the ’30s, Henry Simons, who was the most prominent intellectual at Chicago, was a big proponent of antitrust, and his students, including Milton Friedman and Joe Stigler, were in their early days very much in favor of antitrust.

Why did these people change their minds later? I think that a key historical figure in this change was a faculty member at the time called Harold Demsetz. He had this idea that I thought was quite clever, that if you punish bigness per se, you are punishing success. The companies get big because they are very successful at doing what they do.

That was one line. The second line was brought by Robert Bork, who was a student at Chicago and then became a professor at Yale. He used to say, look, what is the purpose of antitrust? Because think, for example, in modern terms, Google is the best search engine. If you break up Google, the search engine will be of inferior quality. Robert Bork raised the question of, “What is the goal of antitrust itself?” The reason why we do antitrust is to maximize consumer welfare.

Kate: OK. That brings us to one side of the argument. Today, the consumer-welfare approach to antitrust. One way that economists think about consumer welfare is in terms of what they call consumer surplus.

Everyone, for every good or service out there, is willing to pay a certain amount. Some people are willing to pay more than others. If I’m willing to pay for an iPhone, let’s say, $800, and it actually costs only $600 to me as a consumer, then there was $200 of consumer surplus that I would’ve been willing to pay for that phone, but I didn’t actually have to pay it.

Luigi: Kate is absolutely right in that she defined what is consumer surplus. Now, ironically, it is a bit vague what Robert Bork meant by consumer welfare, because consumer surplus is a well-defined economic term. Consumer welfare as the welfare of all the individuals, and that is just welfare, not consumer. Or, it’s just consumer surplus, and then you’re saying that you ignore the other side, which is the producer surplus.

If you go in the direction of saying, “We maximize the welfare of all the individuals,” then you should treat consumers and producers the same way. If you think, “No, the purpose of antitrust is to defend consumers, because, for whatever reasons, they are the weaker side,” then, you go into consumer surplus. Not into consumer ... Sorry. You go into consumer surplus, not into consumer welfare.

I think that in going to the conversation with Carl Shapiro, it is important to keep this in mind, because this is one of the controversial points that is arising even today.

Kate: All right. Now, we’re going to play an interview between Luigi, me, and Carl Shapiro, who is a professor at the Haas School of Business at UC Berkeley. He’s also incredibly influential in the antitrust sphere. He was the deputy assistant attorney general for economics in the antitrust division of the U.S. DOJ. He’s also the major expert witness that’s brought into a lot of antitrust cases, including the recent AT&T/Time Warner case.

Carl Shapiro: Fundamentally, in antitrust we want to ask whether, let’s say, a merger, harms consumers, typically through higher prices or reduced innovation, lower-quality products. And that’s an inquiry that we, as economists, can conduct. At least, try to predict the effects.

A merger may harm the competitors, if the merging firms become more efficient. That would harm the competitors, and that’s not the test. The test that we care about is, if we’re harming consumers, it’s a problem. If it harms the competitors, that may reflect that it’s actually a pro-competitive merger, because it puts the competitors under more pressure.

Luigi: But suppose a merger gains, at least in some areas, so much market power vis-à-vis the labor market, so it’s not necessarily consumer, but it’s a supplier in the form of labor. Should we take that into consideration as well or not?

Carl Shapiro: Absolutely. This is where the consumer-welfare label can be a little misleading and narrow. But the normal case we look at would be this, what I’ve described with how we look at the consumers. But if a merger creates power over workers, or a case that ... does come up at the Justice Department with some regularity is agricultural markets.

Say, two companies that process chickens, they’re the only ones that the chicken farmers can sell to, so the company may have monopsony power, buyer power. That’s absolutely a concern. It doesn’t sound like that would get picked up by the consumer-welfare standard, but the more complete description of the standard would be, if the merger gives significant additional market power to the merging firms, either as sellers or as buyers, that the counterparty, the other side of the market, would be injured by the reduction in competition, that becomes an antitrust problem.

Kate: But that’s not traditionally how antitrust has been enforced, correct?

Carl Shapiro: I think it is, actually. I mentioned agricultural markets would be one. Another example, there was a merger, British Petroleum and ARCO merged and they merged their—attempted to merge, actually, it was blocked to some degree by the Federal Trade Commission—to merge the operations in Alaska, in the North Slope oil fields.

The concern was that if the government would be selling the rights to explore additional oil fields to oil companies, and instead of the two of them bidding against each other to pay more for those exploration rights, they would pay less after merging. So the government, as a supplier of land and oil exploration, was harmed.

So, it is the way antitrust has been enforced historically. It’s just there are fewer cases that involve buyer power than seller power. There’s also a section in the Horizontal Merger Guidelines, which were most recently updated in 2010, that talks about mergers that create buyer power.

Luigi: I think historically, certainly, there were fewer cases, but now people are raising the issue that maybe Amazon is getting so much market power—not with consumers, or at least that doesn’t seem to show up with consumers because the prices are quite low—but with suppliers.

Are you concerned about the larger market share that Amazon has in certain sectors, and is that potentially a source of antitrust investigation, if not enforcement?

Carl Shapiro: Potentially, yes. I don’t know enough of the facts to make a call on that, but, yes, if it got to the point where there were many suppliers who feel they could only get to the market through Amazon, and Amazon could depress unreasonably low the prices they receive, that could definitely be a problem.

The other area that you mentioned earlier, labor markets, has not generally been an area that’s seen much antitrust attention. We had a case involving the tech companies, the so-called no-poach case, which was not a merger, but more of a collusion case, actually, when I was at DOJ. But I think there’s additional research going on now.

There are people, scholars, who are suggesting there’s significant market power, buyer power, among large companies in labor markets, and I think that the antitrust agencies should be looking into that. This might be state attorneys general, as well as the DOJ, for example, because this could be more local markets, and see whether that’s true, and if it is, it may be a whole new front for antitrust that’s been underdeveloped.

Kate: Do you think that there’s room for the text of antitrust law to be changed, or do you think that most of the changes should come about through enforcement?

Carl Shapiro: Well, there’s legislation currently proposed by Senator Klobuchar to beef up some antitrust enforcement. I think moderate changes could be made, for example, to codify the structural presumption against mergers that significantly increase concentration, and I think a number of ... I’m open to that, for example.

More fundamentally changing the Sherman Act, or a more fundamental change about what antitrust law is trying to do, I am very skeptical of, and I view as hazardous, actually, to the extent that it might move antitrust in a direction away from focusing on promoting competition and trying to do other things that might not work well in the law-enforcement setting.

Kate: A New Brandeisian might also argue that an issue with the consumer-welfare approach to antitrust is that it’s excessively focused on M&A analysis and not enough on large, dominant firms, particularly in tech. The type of exclusionary actions that they could undertake and, say, predatory pricing, and it doesn’t really have a good response for the platform economy. What would your response be to that?

Carl Shapiro: Yeah, I think that’s kind of a misdirection in the sense that I view it as not really fundamentally a challenge about the consumer-welfare approach or ... Which, let me summarize again, meaning we look for mergers or conduct that disrupts the competitive process and hurts consumers. That’s what we’re looking for under that approach.

I think that set of challenges as more to be about the actual operation of antitrust law. What does it take to bring a monopolization case against, maybe, Amazon as one of the companies that is criticized by this way of thinking? Is predatory-pricing analysis, is it too high a hurdle for the plaintiff to bring a case against Amazon, accepting the consumer-welfare standard? I don’t think there’s a problem right now on that front, and I think Amazon brings a lot of benefits, but that’s a perfectly legitimate debate to me. I would say it’s a debate ... one we had vigorous debates about that in ’70s and ’80s, particularly in the 1980s, which was Brooke Group, the key Supreme Court precedent that was reached, with a lot of literature on different standards for predatory pricing.

And the world’s changed, technology changed, but there’s learning there, and I’m not sure the people who are revisiting this have fully appreciated the debate that took place 30 years ago.

Luigi: Let’s hit the pause button for a second and discuss this first part that is quite important, which is, how convinced are you, Kate, about the consumer-welfare approach as Carl presented it?

Kate: What I think is convincing is his argument that, yeah, in all of these cases the consumer-welfare approach could be applied, right? In the case of monopsonies or antitrust in the labor market, in any manner of cases, you could adopt the consumer-welfare approach, which is to do a cost-benefit analysis of how much consumers would be hurt by potential monopoly and how much they could also benefit on the other side. I mean, that seems sort of very general and very foundational. It’s hard to argue with that approach.

But when I step back and think about it, what bothers me is that the practical reality of the consumer-welfare approach to antitrust is very different in the sense that we haven’t actually been going after that many cases.

The recent AT&T/Time Warner case was dismissed and before that, the last major successful antitrust enforcement was with Microsoft in 1999, which was like two decades ago. When I listen to what he says, it makes sense to me. But when I look at the actual practice of antitrust enforcement, I think it’s much harder to say that it’s impartial and it’s purely economic. I think it’s too influenced by political forces, which can distort the way that antitrust actually works.

Luigi: I think you raise an excellent point, but I would like to distinguish enforcement from principles. The principle could be right and the enforcement could be lax, and if we need to fix enforcement, it’s a different story than if we need to change a principle.

I have to say that I think he did an excellent job, but I’m a little bit perplexed by this position of the consumer-welfare approach, because they claim to be very scientific and behave like economists, but at the end of the day, they’re not. I’m very glad that Carl believes that you should also go after monopsony, but why do you call it consumer welfare? It’s not consumer welfare because in a monopsony, consumers might be better off.

What is it that they’re maximizing? The question that Robert Bork asked: What are we trying to achieve with antitrust? And we should have a clear principle. I don’t think that has been fully answered, yet.

Kate: At the top of this episode, we talked about the other side of the argument, the New Brandeisians. Let’s bring this up with Carl and see what his response is to the presence of this New Brandeisian movement and whether he agrees with them at all.

Luigi: But you have taken a position against these New Brandeisians’ approach to antitrust that is not exactly new. It’s trying to go back to the original foundation of antitrust that was written in sufficiently generic terms that it could include also being concerned about the excessive political power that firms had. Why are you so dead set against that?

Carl Shapiro: I should say, as a citizen, I’m very deeply concerned about the excessive political power of large corporations and too much money in politics. I’m very concerned about that. Corruption, writ large, if you will. I want to say that first.

In terms of antitrust, I just think that asking the Justice Department to review mergers based on political power sounds like a really bad idea. A really dangerous thing to do, or even to ask the judiciary to do that. I’m not sure what they would do and it seems hazardous.

Now, you mentioned the original Sherman Act, and it’s certainly true that if you go back and look at the congressional record there, what the historians tell us is there was a generalized concern about corporate power at that time, in the late 19th century, as the industrial companies grew large and became more national.

But if you look at the text of the law, it talks about monopolization and economic effects, and you look at how the law was immediately interpreted by the Supreme Court. It quickly went to applying the statute, it was about economic power. And we now have more than a century of well-developed case law in this area. I don’t think people who’ve proposed some alternative have really given us a practical way to go, and as I said, it could be quite dangerous.

Luigi: I agree it’s dangerous, and I agree there are not set guidelines, but why can’t we ... And I’m not saying that we’re there yet, but why can’t we do more work in this area and have some guidelines saying that, look, excessive concentration leads naturally to more capture and is negative for the political economy of a country?

Carl Shapiro: Look, I think there’s a lot of intuitive appeal to what you say, OK? It sounds like now that would be economy-wide, though, right? That could be many different sectors you could be concerned about this.

Luigi: Absolutely, yeah.

Carl Shapiro: OK.

Luigi: Could be chickens.

Carl Shapiro: Right, right. I think, let’s just say, I don’t have a good answer on this one. Now you’re telling me, “We’re so concerned about political power and we don’t seem to have other tools to deal with the political power of large corporations such as campaign-finance reform or transparency—”

Luigi: After Citizens United, I think that we are limited in that ability. You’re absolutely right, if the Constitution were not limiting that, then we could go in a different direction, but—

Carl Shapiro: OK. I’m saying, if we think those tools are unavailable, for whatever reason, Constitution or political will, or whatever, then I think it is not unreasonable to point in the direction of some broad-based, concentration-limiting rules.

I am nervous about how those would work in practice. As an antitrust expert, I bristle at calling that antitrust. It’s a different regime. It’s not competition in the market, the way that antitrust folks tend to think about it. And I guess I would say, would you please flesh out how this would work and specify? And then we could have a debate about whether it might cause a lot of trouble or whether it would be important to protecting democracy.

Kate: Luigi, I think he was hitting the ball back over to your court.

Luigi: Yes, he was, but most importantly, to Lina Khan’s court. She’s one of the leading proponents of the Brandeisian approach, and we’re going to interview her next week.

Kate: It’s like a doubles match. You’re letting her handle the shot.

Luigi: Absolutely.